Banks' bad loans selling fast

Reuters News Service

Published 5:30 am, Monday, August 27, 2001

NEW YORK -- Bad loans are the bane of commercial bankers, but they are a hot commodity on Wall Street.

Under pressure from shareholders, financial analysts and regulators to avoid loan losses in a slack economy, U.S. banks are unloading problem loans from corporations, sometimes at a 25 to 30 percent markdown, analysts said.

They said top Wall Street firms, such as Goldman Sachs Group, and financing companies such as GE Capital are waiting hungrily to buy the assets at bargain prices.

"The nonperforming loan market has been pretty active," George Bicher, an analyst at Deutsche Banc Alex. Brown, said. "The banks have been using it as one way to manage their credit risks through this cycle. There's been a decent amount of liquidity ... Both dedicated funds and companies are looking to take advantage of the situation."

For some banks, dumping bad loans is the best way to clean up their balance sheets and free up management to focus elsewhere. They may sell for reasons that often don't seem to make economic sense. Banks want to shed bad loans in case the economy worsens, losses mount and they are forced to increase reserves, depleting money they can lend, to cover bad loans.

The brokerages and funds that scoop up the loans don't have the same burden to disclose and ditch problem debts that banks do, enabling them to sit tight and wait for borrowers to repay.

The Wall Street firms trade the distressed debt for customers, buy them on behalf of funds or hand them to niche units that devise ways to securitize the debt. So-called vulture funds buy the debt as a way to gain control of a company.

Big U.S. banks from Bank of America Corp. to Bank One Corp. have unloaded billions of dollars worth of loans this year. FleetBoston Financial, for example, in January sold $1 billion in troubled commercial loans, getting $725 million in cash and a $203 million note in return.